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Successful People as Investors: Rolling over Retirement Plan Funds

Many investors who have recently changed jobs, or are contemplating a job change, have asked about their options regarding the funds in their 401K or other defined contribution plan

Many of my clients who have recently changed jobs, or are contemplating a job change, have asked about their options regarding the funds in their 401K or other defined contribution plan.

What Are The Options?

If you change jobs, or leave an employer for any reason, you’ll need to consider what to do with your assets held in the employer’s retirement plan. What’s right for you depends on a number of factors, including your current financial situation and long term goals. Generally, when you leave an employer, there are four options available regarding the funds in your retirement plan: take a cash distribution, keep the funds in your current retirement plan, roll over all or some of the funds to your new employer’s plan, or roll over the money into an IRA.

Taking a Cash Distribution

For most people, this is a very tempting option; however, it’s usually the least advantageous. The distribution is subject to income tax in the year you receive it and your now former employer must withhold 20% for federal income tax purposes. Plus, there may also be an additional 10% penalty on distributions made prior to age 59 ½. I would urge consulting an accountant before taking a cash distribution from a qualified retirement plan.

Keeping the Funds in Your Current Plan

Leaving the money in your current plan might be an option worth considering if you’re happy with the plan’s investment choices and performance. Keep in mind that most plans offer a rather limited menu of investment choices, and may restrict how often you can move from one type of investment to another. Also, consider how shifting market conditions--over which you have no control--are apt to affect the value of your retirement assets.

Moving The Funds Into a New Employer’s Plan

If your current plan permits doing this, your assets will continue to benefit from tax deferred treatment of earnings. Remember that you may not have many investment options in the new plan either, and your new employer’s plan may limit your flexibility to change investments. Also, depending on the plan provider’s capabilities, gaining access to your assets can be delayed by processing timetables.

Rolling Over The Assets Into an IRA

The most flexible option is to roll over your assets into an IRA. The “Rollover IRA” can offer much broader investment choices than moving your money to a new employer’s plan or keeping the savings in your current plan. It also allows for increased account control by letting you change your investment mix more often as market conditions or your financial goals change. Your assets can continue to grow on a tax deferred basis, and there are no immediate tax consequences or early withdrawal penalties.

You can also manage your distributions by drawing on your IRA funds according to your own timetable; without being constrained by a predetermined distribution schedule from an employer retirement plan. You do not pay taxes on money held in an IRA until the money is withdrawn. Many investors may well be in a lower tax bracket when they access their money (usually in retirement) than when they made the contributions.

If you’ve recently changed jobs or are considering a change, and you want a flexible, tax-advantaged option for your retirement plan funds, consider a “Rollover IRA”. Incorporating a “Rollover IRA” into your overall financial plan can be an important step toward more effective wealth management.




Securities and Investment Advisory Services offered through Royal Alliance Associates Inc., member FINRA/SIPC and a registeredinvestment advisor. Freedom Capital Management is not associated with Royal Alliance Associates Inc. or registered as a broker/dealer orinvestment advisor.

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